Due diligence for property purchase

What does due diligence mean with regard to property purchase? Basically, it is a thorough investigative process whose objective is to determine whether or not a certain real estate option is safe to invest in. Santhosh Kumar, Chief Executive Officer – Operations & International Director, JLL India, tells us more about it.

Real estate buyers are often warned that they must conduct a thorough due diligence before investing in any property, and that they should not reply solely on the verification process done by banks while they are processing a home loan request. This is sound advice, especially in the current times when many buyers have found themselves in troubled waters after making property purchase decisions without doing their homework.

What does due diligence mean with regard to property purchase? Basically, it is a thorough investigative process whose objective is to determine whether or not a certain real estate option is safe to invest in. The process requires different elements to be focused on, depending on whether one is purchasing a ready-to-occupy property or one which is under construction. A due diligence for redeveloped properties also has specific areas to be focused on.

Ready-to-occupy properties
Get all details pertaining to the developer’s credibility: Of particular importance is the developer’s delivery track record of past projects. There are many aspects that directly affect the level of risk, but are never revealed to buyers. The required information needs to be assimilated at a local level, preferably by someone who has been residing in the locality for a while.

Ask the developer for the approved drawings of the project, a copy of the IOD (intimation of disapproval) and completion certificate and a clear land title. Ensure that the property is free of litigation and any kind of associated debt. Also, establish the existence of a proper society. If one is buying a second-hand property, proper transfer and re-registration should be done before hand over. The documents required for registration of a residential flat, apart from the sale deed, will include a letter from the society that reflects the number of floors in the building, the year in which the building was constructed, the apartment’s built-up area and the number of lifts in the building.

The buyer should have a proper check list in place; this must include the approved usage of the property, notices of any pending or threatened litigation or governmental action relating to the real estate or seller, any applicable condominium documents, service contracts, all construction-related documents including warranties, as-built plans and specifications etc.

Under-construction properties
If the project is under construction, get an accurate idea of the project’s progress. This is especially true if the property is being bought directly from the developer. When no property advisor is involved in the transaction, the risk of falling prey to a deceptive projection of the project’s development progress multiplies manifold.

The buyer needs to establish whether the builder has free and clear ownership of the land on which the project is being built. An agreement between builder and the original owner of the land is not sufficient. The project also needs to have an IOD. This is a set of instructions that a developer needs to comply with so that he can legally construct the project. The IOD is valid for one year and needs to be reissued if the project has not been completed in a year’s time. The project also needs to have a commencement certificate in place.

While considering a pre-launch option, it is even more necessary to establish the trustworthiness of the builder, especially in terms of his track record for transparent dealings and compliance with legal formalities.

Redeveloped properties
For a redeveloped property, the paperwork is the same as for a new one as the project is complete, no matter what its history is. In the case of redeveloped properties, there are two possible scenarios:

In the first scenario, discussions regarding redevelopment are ongoing between the society and developer, but no agreement has yet been signed. In such a case, buying into the project is as good as buying into a normal resale property.

In the second scenario, an agreement is already in place between the society and the developer. If one of the society members wishes to sell his property and has found a buyer, there are three parties involved in the transaction – the seller, the buyer and the developer. The developer in question needs to be kept in the loop so that the rights of the existing society member who is selling his property are properly transferred to the buyer, with the knowledge of the society.

In case the agreement is signed between society and developer, there are two situations possible. In the first, the building has yet to be demolished, in which case the process is simple – the buyer moves into the property, to vacate along with other society members at the time of actual redevelopment.

However, if the building has already been demolished, the old flat no longer exists and the new one is yet to be constructed. In this case, the permission of both the society and developer are required since, though money has changed hands, the transaction is incomplete until the property has been reconstructed and registered in the new owner’s name. The agreement needs to mention this appropriately.

In the case of a redeveloped property, apart from the usual due diligence, the development agreement between society and developer must be checked on. The new buyer must ensure that the seller is surrendering all rights and claims after the property is reconstructed.

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